In this 2008 feature for Freedom, published shortly after the first major bank bailout as the recession began to bite, Iain McKay explains the cost of believing big business
With the financial markets in a panic, the calls for bailouts have increased – and the bank of England has responded with a huge rates cut, while Brown has underwritten banks to the tune of billions.
Yet this seems to directly contradict one of the key defences of capitalism and its tendency to produce profits for the few - namely that such inequality is the result of “risk taking.” For capitalists, taking profit from others’ labour is fair because as owners they took a gamble in providing startup cash.
According to capitalist theory, those who take the risks should pay the price. Yet, when push comes to shove, the socialisation of risk – where society pays for failures either through state aid, consumer losses or through attacks on social institutions like pensions - is always there.
This is because, it is claimed, the impact of letting huge institutions – like banks - fail would harm everyone. Strangely, though, during the good times the impact of inequality was ignored. If the few benefit the many can go hang; if the few are threatened, then the many must pay.
This is something capitalism is built on, not some kind of unusual event only applicable in bad times. Most kinds of "risks" within capitalism do not contribute to production and, thanks to state aid, not that risky.
Appeals to “risk” to justify capitalism are somewhat misleading given the dominant organisational form within it – the corporation. These firms are based on “limited liability partnerships” designed explicitly to reduce the risk faced by investors. As Joel Bakan explains, before the introduction of LLPs: “no matter how much, or how little, a person had invested in a company, he or she was personally liable, without limit, for the company's debts. Investors' homes, savings, and other personal assess would be exposed to claims by creditors if a company failed, meaning that a person risked finance ruin simply by owning shares in a company.
“Stockholding could not become a truly attractive option... until that risk was removed, which it soon was. By the middle of the nineteenth century, business leaders and politicians broadly advocated changing the law to limit the liability of shareholders to the amounts they had invested in a company. If a person bought $100 worth of shares, they reasoned, he or she should be immune to liability for anything beyond that, regardless of what happened to the company.”
“Limited liability's “sole purpose... is to shield them from legal responsibility for corporations' actions” as well as reducing the risks of investing (unlike for small businesses). (The Corporation, p. 11 and p. 79)
This means stock holders (investors) in a corporation hold no liability for the corporation's debts and obligations. It is, in effect, a state granted privilege to trade with a limited chance of loss but with an unlimited chance of gain.
This is an interesting double-standard. It suggests that corporations are not, in fact, owned by shareholders at all since they take on none of the responsibility of ownership, especially the responsibility to pay back debts. Why should they have the privilege of getting profit during good times when they take none of the responsibility during bad times? Corporations are creatures of government, created with the social privileges of limited financial liability of shareholders. Since their debts are ultimately public, why should their profits be private?
This reducing of risk is not limited to individual states, it is applied internationally as well. Big banks and corporations lend money to developing nations but “the people who borrowed the money (i.e. the local elite) aren’t held responsible for it. It’s the people... who have to pay (the debts) off... The lenders are protected from risk. That's one of the main functions of the IMF, to provide risk free insurance to people who lend and invest in risky loans. They earn high yields because there's a lot of risk, but they don't have to take the risk, because it's socialised.” (Noam Chomsky, Propaganda and the Public Mind, p. 125)
Capitalism has developed precisely by externalising risk and placing the burden onto other parties - suppliers, creditors, workers and, ultimately, society as a whole. To then turn round and justify corporate profits in terms of risk seems to be hypocritical in the extreme, particularly by appealing to examples of small business people whom usually face the burdens caused by corporate externalising of risk.
Doug Henwood further notes in this context that the “signals emitted by the stock market are either irrelevant or harmful to real economic activity, and that the stock market itself counts for little or nothing as a source of finance”, making the argument for risk as a defence of profits seem extremely weak. (Wall Street, p. 293 and p. 292)
As David Schweickart points out, “[i]n the vast majority of cases, when you buy stock, you give your money not to the company but to another private individual. You buy your share of stock from someone who is cashing in his share. Not a nickel of your money goes to the company itself. The company's profits would have been exactly the same, with or without your stock purchase.” (After Capitalism, p. 37)
“In spite of the stock market's large symbolic value, it is notorious that it has relatively little to do with the production of goods and services,” notes David Ellerman. “The overwhelming bulk of stock transactions are in second-hand shares so the capital paid for shares usually goes to other stock traders, not to productive enterprises issuing new shares.” (The Democratic worker-owned firm, p. 199)
In other words, most investment is simply the “risk” associated with buying a potential income stream in an uncertain world. The buyer's action has not contributed to producing that income stream in any way whatsoever yet it results in a claim on the labour of others.
New wealth flows from production, the use of labour on existing wealth to create new wealth.
In fact, the stock market (and the risk it is based on) harms this process. The notion that dividends represent the return for “risk” may be faulted by looking at how the markets operate in reality, rather than in theory. Stock markets react to recent movements in the price of stock markets, causing price movements to build upon price movements. According to academic finance economist Bob Haugen, this results in inherently unstable finance markets, with such price-driven volatility accounting for over three-quarters of the spikes and dips reported.
This leads to the market directing investments very badly as some investment is wasted in over-valued companies and under-valued firms cannot get finance to produce useful goods. The market's volatility reduces the overall level of investment as investors will only fund projects with a sufficiently high level of return. This results in a serious drag on economic growth. As such, “risk” has a large and negative impact on the real economy and it seems ironic to reward such behaviour.
Given that the capitalists (or their hired managers) have a monopoly of decision both as buyers on the market through their superior information and buying power, and within firms, any risks made by a company reflects that hierarchy. As such, risk and the ability to take risks are monopolised in a few hands.
If profit is the product of risk then, ultimately, it is the product of a hierarchical company structure and, consequently, capitalists are simply rewarding themselves because they have power within the workplace. In other words, because managers monopolise decision making (“risk”) they also monopolise the surplus value produced by workers. However, the former in no way justifies this appropriation nor does it create it.
As production is inherently collective under capitalism, so must be the risk. As Proudhon put it, it may be argued that the capitalist “alone runs the risk of the enterprise” but this ignores the fact that capitalist cannot “alone work a mine or run a railroad” nor “alone carry on a factory, sail a ship, play a tragedy, build the Pantheon.”
As production is collective, so is the risk faced and, consequently, risk cannot be used to justify excluding people from controlling their own working lives or the fruit of their labour. The most serious consequences of “risk” are usually suffered by working people who can lose their jobs, health and even lives all depending on how the risks of the wealthy turn out in an uncertain world. As such, it is one thing to gamble your own income on a risky decision but quite another when that decision can ruin the lives of others.
With the panics in the finance markets, now is an ideal time for anarchists to argue that running an economy based on allowing the few to control, gamble and profit from the labour of the many is not only immoral, it does not work.
We need a society which is not based on bribing the rich to ensure investment and economic development. We need, as anarchists have long argued, an economy in which those who do the work control both it and its product.